Gold Rallies as Fed and RBNZ Extend Pauses

After a dip to 1649.2, gold rebounded sharply and settled at 1700.1, up +2.17%. The consecutive weekly gains over the past week suggest that the correction from 1923.7 in early September has probably ended at 1523.9 in December. A deliberate break above 1750 would give more evidence on the resumption, and likely the last leg, of the long-term uptrend. Gold's surge yesterday and the strength today have been driven by the dovish January FOMC statement. The first rate hike will be delayed to at least until late-2014 from mid-2013. Policymakers' downward revisions of growth forecasts have also increased the likelihood of further monetary easing. These factors are beneficial for gold's rise.

At the January FOMC statement, the Fed announced that the Fed funds rate will stay at exceptionally low level 'at least through late 2014'. At the same time, the central bank released interest rate projections of participants and a statement on its longer-run goals and strategy, indicating a 2% long-run target for the PCE deflator. The tone of the policy statement and the press conference turned more dovish, reflecting the highly uncertain global economic outlook.

Among the 17 members delivering interest rate projections, 3 anticipated the first rate hike this year, 3 anticipated next year, 5 in 2014, 4 in 2015 and 2 in 2016. The distribution of projections was rather flat with most expecting a rate hike at least in 2014 or after. Fed Chairman Ben Bernanke said that the forward guidance should be given priority over the projections as the former is a policy statement agreed to by the FOMC while the latter is just an aggregation of forecasts. In general, policymakers pledged to maintain a 'highly accommodative stance for monetary policy' so as to bolster economic growth and to keep inflation at levels consistent with the dual mandate over time. The Fed signaled that further monetary easing cannot be ruled out and we believe that QE3 will be adopted this year, probably after operation twist is finished.

Today in Asian session, the RBNZ left the OCR unchanged at 2.5% and signaled that the pause might be longer than previously anticipated. As mentioned in the statement, 'given ongoing uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent to keep the OCR on hold at 2.5%'. With 'for now' missing in the January statement, it appears that the central bank will now keep interest rate unchanged for a longer period of time.

Policy decisions made by the Fed and the RBNZ signaled that world central banks will maintain loose monetary measures for a longer period of time than previously planned. Low interest rates and accommodative monetary policies are positive for gold as the opportunity costs of owning the precious metal are lower. Moreover, uncertain macroeconomic outlook also increases gold's appeal as a safe-haven asset.